Timing of 415 application to accrued benefit

[Guest saeissler]

If a participant is not yet at normal retirement date, can we still calculate the benefit at normal retirement date under the plan formula, then limit it to 415 at normal retirement date, then apply the accrual fraction, to obtain the accrued benefit. This is an issue when the normal retirement benefit is something like 255% compensation reduced for yrs of service less than 25 years. A participant with 5 years of participation now and 40 at NRD, limiting the benefit to 415 at NRD, would have an accrued benefit of 100% X 5/40 = 12.5%. But not limiting the benefit before the accrual fraction would give 255% X 5/40 = 31.9%.

The preamble to the final regulations states: "As indicated in the preamble to the proposed regulations, where a participant's accrued benefit is computed pursuant to the fractional rule of section 411(b)(1)©, the limitations of section 415(b) apply to the accrued benefit as of the end of the limitation year and, for ages prior to normal retirement age, are not required to be applied to the projected annual benefit commencing at normal retirement age from which the accrued benefit is computed."

Does the "are not required to be applied" mean "do not apply" or "do it either way"?

Any thoughts?

[ak2ary]

I believe they mean "Do what the document says" and the document can choose either way to apply the rules

[SoCalActuary]

You asked if the plan document can use a formula that never exceeds the 415 limit at any point from now to nra. Sure, no problem.

But you give up the intent of the other method, where the projected benefit is only used to determine the starting point for fractional accrual.

The IRS is telling you that the accrued benefit is what you must limit. If you want a safe harbor design with a census that includes very young employees,

you can get a better result with the type formula you described with the limit applied only to the final step.